What a Depleted Highway Trust Fund Means for States

U.S. DOT tells states to be prepared for a slowdown in cash disbursements.

Last week Congress was warned of what might happen if the federal accounts that pay for transportation become depleted, as they’re forecast to do in fiscal year 2015. The scenario, outlined by Polly Trottenberg, the undersecretary for policy at the U.S. Department of Transportation (DOT), prompted plenty of questions from members of Congress. But it’s state transportation officials who should be worried.

By now, the fiscal challenges facing the Highway Trust Fund, which receives federal gas tax revenue and then distributes it to states for infrastructure projects, are well known: Americans are driving less, vehicles are becoming more fuel efficient and the gas tax hasn't been increased in 20 years. If the trust fund experiences a cash shortfall, the DOT will be forced to start taking steps to manage whatever cash it has left. Trottenberg gave Congress a detailed look at what exactly that might mean for states -- and the situation isn’t pretty.

The Federal Highway Administration (FHWA) sends funds to states through six formula programs, but the money isn't provided in advance. Instead, state departments of transportation enter agreements with FHWA, award contracts to construction companies and then rely on getting payments from the feds in order to make payments to the contractors.

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Some states bill the feds daily; others bill them weekly. But if the trust fund gets too depleted, states will start getting reimbursed less and less frequently, perhaps as rarely as twice a month, Trottenberg warned. Even worse for states: If the situation gets bad enough, the feds might only be able to cover a portion of states’ reimbursement requests. If that happens, states could be forced to pull back on some projects.

If such a scenario seems far-fetched, it shouldn’t. While the Highway Trust Fund has a relatively healthy history that dates back to 1956, it was in fiscal year 2008 that the DOT announced that it didn't have enough cash in the account to cover states’ outstanding bills. At the time, it was agreed that FHWA would stop twice-daily payments and switch to weekly payments. States would get most of what they were owed on their scheduled payment dates, with a portion of the balance carried over to the following week. The system ensured a steady stream of funds coming to states, but it quickly built up the balances owed on the back end and relied on states to carry the difference.

Then-Transportation Secretary Mary Peters asked Congress for financial support, resulting in the transfer of $8 billion in general funds to the Highway Trust Fund. Ever since then, Congress has been transferring money to the fund regularly. According to the Congressional Budget Office (CBO), since 2008, Congress has transferred a cumulative $41 billion from the general fund to the fund to avoid shortfalls, with another $12.6 billion set for 2014.

The Highway Trust Fund is made up of two accounts -- one for highways and one for transit. As it stands, budget forecasts indicate that by the end of fiscal 2014 the highway account will have a cash balance of $4.6 billion. That's problematic, because in a given month the feds might reimburse states more than $5 billion. The transit account faces a similar shortfall as the highway account: It will end the year with a $300 million balance, but some months, it pays out as much as $1 billion.

“While the timing of the forecasts is subject to change, there is little doubt that another funding shortfall will soon be upon us,” Trottenberg testified.

Congress has options to prevent the situation from becoming dire. It can transfer another $15 billion into the trust fund and authorize increasing large transfers in subsequent years. It can raise the gas tax by 10 cents per gallon. It can eliminate the $51 billion in highway and transit spending authorized for 2015. Or it can implement a combination of transfers, tax hikes and cuts.

After the 2008 scare, new standards were put in place to give states greater warning when the account’s balances drop below certain thresholds. But it’s not necessarily a given that Congress will act in a timely manner to prevent states from getting stiffed. After all, it’s shown a willingness to play chicken with transportation issues before. Earlier this year, fliers experienced delays due to Federal Aviation Administration (FAA) furloughs attributed to sequestration. In 2011, Congress failed to extend the FAA’s authority, forcing the agency to tell contractors to stop doing work at dozens of airports. And that same year, there was concern that congressional inaction would cause the gas tax to lapse, which could have resulted in lost revenue of $100 million per day.

Michigan Transportation Secretary Kirk Steudle says that if the feds start holding back on payments, it could be an especially big problem for states that have their own cash flow problems. But even more troubling than delays, he says, is the possibility that states will never fully get repaid.

Deb Miller, who served as secretary of the Kansas Department of Transportation in 2008, says the situation back then caused a lot of fear and uncertainty. She says her state conducted analyses and determined it could handle a slowdown in reimbursements for a few months before it would struggle to pay its own bills without the feds help. Of course, Congress ultimately bailed out the fund before real problems materialized.

Today, Miller says, states are perpetually planning for the worst. “[There] is endless uncertainty," she says. "Absent a permanent fix, we're just not going to get out of this situation.”

It’s not entirely clear how states might respond to the current situation. Kim Cawley, a CBO analyst, testified that there are a few possibilities. They might be willing to simply wait longer for their reimbursements; they might slow down on projects to avoid overextending themselves; or they might actually speed up construction in an effort to get reimbursed ahead of other states and before the money runs out.

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